Daily Development for Monday, October 9, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
RULE AGAINST PERPETUITIES; SAVINGS CLAUSE; Maryland court upholds savings clause that uses no life in being.
Cattail Assoc’s. v. Sass, 2006 Westlaw 2639872 (9/15/06)
Developer executed a contract with sellers in anticipation of subdividing. The contract contained a specific condition that relieved the developer from its purchase obligation unless and until all subdivision approvals were received:
“The Settlement of this contract is specifically contingent on the successful completion of the subdivision which shall be evidenced by the obtaining of all the necessary approvals from [various planning agencies] that are required . . . .”
It became clear to developer that Sellers were starting to waver on the deal. It elected to waive all conditions and demanded performance. As Developer likely anticipated, Sellers refused to close and raised a number of defenses to the validity of the agreement, among them the claim that the contract violated the Rule Against Perpetuities, as, obviously, it was remotely possible that the subdivision approvals might not be obtained with the period of a life in being plus 21 years. Even though the developer was willing to waive this condition, such waiver would mean nothing if the contract was void from the beginning as a consequence of the violation of the Rule.
First, the developers argued that the court should imply a reasonable period of time within which the parties intended that subdivision approval be obtained before the contract right expired. This approach is used with option contracts in many jurisdictions. Even though technically the option might be exercised beyond the period of the Rule, the court, in order to save the option, reads in a reasonable period within which the option must be exercised.
Maryland, which apparently follows the traditional common law Rule, had some precedent cases that indeed do use the implied reasonable term for option contracts, but the court distinguished these cases and refused to save the contract here by assuming a reasonable period for obtaining of the zoning approval. It noted that, unlike an option, the buyer was not in control of the granting of subdivision approval.
The developer’s counsel, however, had anticipated the problem with the Rule Against Perpetuities, and had inserted a “perpetuities savings clause.” Notwithstanding this thoughtfulness, for some reason the lawyer did not insert the standard savings clause that is used virtually universally, albeit with different identified lives. This standard clause is varioiusly known as the “Kennedy clause” or the “Rockefeller clause” as it terminates the future rights created in third parties in the contract 21 years after the death of the last survivor of a group of named or identified individuals, usually including the living descendants of Joseph Kennedy, the father of John F. Kennedy, or John J. Rockefeller. Both had lots of descendants whose lives, due to the notoriety of the families, are easy to track. Since the future interests cannot possibly take effect beyond the measuring period set forth in this clause in the contract, there is no possibility of a future interest vesting beyon
d the period of “a life in being plus 21 years.”
For some reason, the drafters of the contract in this case elected to use a different savings clause - one the Editor hasn’t seen before - perhaps even drafted “freehand” by the lawyers in this case:
“The parties to this contract intend that it will be binding and legally valid upon them. In order to preclude any application of the Rule Against Perpetuities which would otherwise invalidate and nullify this contract, the parties agree that this contract shall expire, unless otherwise previously terminated, on the last day of the time period legally permitted by the Rule Against Perpetuities in the State of Maryland. . . . .”
Of course, it is not absolutely necessary that the measuring life used by the Rule itself be expressed in the instrument. In fact, commonly there is no identified life, and drafters use lives that are “central to the grant.” If, in a savings clause or otherwise, the instrument identifies lives in being, usually these are in addition to the lives central to the grant. But is it possible to have the savings clause itself have implied lives in being?
The simple answer is: “why not?” The implication of lives in being that is common in jurisprudence involving the Rule is nothing more than an inference of the probable intent of the parties, according to the court.
Thus, here, the court held, the parties, but use of the above savings clause, indicated their intent to used the lives of the sellers as the measuring lives. Any approval of the subdivision that occurred 21 years beyond the death of the last of the original Sellers (one of them, incidentally, had already died at time of suite) would, by the terms of the savings clause, be invalid.
Consequently, it was impossible for the contract contingency to be resolved beyond the period of lives in being plus twenty one years, and the contract was not invalidated by the Rule. (Other problems did cause some difficulties for the buyers, however.)
Comment 1: The editor really doesn’t mind the Rule Against Perpetuities. It seems that there ought to be some prohibition of perpetually contingent rights. And thoughtful lawyers can always avoid the Rule with a savings clause. Further, the editor agrees with the court’s interpretation here. There is no reason why this savings clause ought not to be effective. Even if there are no lives in being, at least there could be a 21 year contingency period, which would be more than enough to validate the instant contract.
Comment 2: But even though the drafters of this savings clause got away with something, why take a risk? The traditional Rockefeller or Kennedy clauses in fact give the contracting parties a bit more latitude, have been consistently upheld by the courts, and work better with the phrasing of the Rule. This is not an area for creative writinjg.
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